Attached files
| file | filename |
|---|---|
| EX-32.2 - EXHIBIT 32.2 - Innophos Holdings, Inc. | iphs10q093017ex322.htm |
| EX-32.1 - EXHIBIT 32.1 - Innophos Holdings, Inc. | iphs10q093017ex321.htm |
| EX-31.2 - EXHIBIT 31.2 - Innophos Holdings, Inc. | iphs10q093017ex312.htm |
| EX-31.1 - EXHIBIT 31.1 - Innophos Holdings, Inc. | iphs10q093017ex311.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________
FORM 10-Q
___________________________________________
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017 | |
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to . | |
Commission File Number 001-33124
___________________________________________
INNOPHOS HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
___________________________________________
Delaware | 20-1380758 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
259 Prospect Plains Road Cranbury, New Jersey | 08512 | |
(Address of Principal Executive Offices) | (Zip Code) | |
Registrant’s Telephone Number, Including Area Code: (609) 495-2495
____________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” "accelerated filer," “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | x | Accelerated Filer | o | |
Non-accelerated filer | o | (Do not check if a smaller reporting company) | ||
Smaller reporting company | o | |||
Emerging growth company | o | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of October 26, 2017, the registrant had 19,528,992 shares of common stock outstanding.
Page 1 of 40
TABLE OF CONTENTS
Page | ||
Financial Information | ||
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Other Information | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
Page 2 of 40
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Unless the context requires otherwise, references to “Innophos,” “the Company,” “we,” “us” or “our” in this Quarterly Report on Form 10-Q refer to Innophos Holdings, Inc. and its consolidated subsidiaries.
This Quarterly Report on Form 10-Q contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve substantial risks and uncertainties. In some cases, you can identify forward-looking statements by the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “objective,” “ongoing,” “plan,” “predict,” “project,” “potential,” “should,” “will,” or “would,” and/or the negative of these terms, or other comparable terminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements.
Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report on Form 10-Q, we caution you that these statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which we cannot be certain.
The forward-looking statements in this Quarterly Report on Form 10-Q may include, among other things, statements about our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, the demand for our products and services, the markets in which we compete and other information that is not historical information
You should refer to “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission on February 28, 2017, for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report on Form 10-Q will prove to be accurate. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete discussion of all potential risks or uncertainties that may substantially impact our business. Moreover, we operate in a competitive and rapidly changing environment. New factors emerge from time to time and it is not possible to predict the impact of all of these factors on our business, financial condition or results of operations.
Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
You should read this Quarterly Report on Form 10-Q and any documents that we reference in this report completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
Page 3 of 40
PART I - FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(Dollars in thousands, except per share amounts, the number of shares or where otherwise noted)
September 30, 2017 | December 31, 2016 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 32,732 | $ | 53,487 | |||
Accounts receivable, net of allowance for doubtful accounts ($483 and $164) | 102,162 | 77,692 | |||||
Inventories | 148,536 | 128,295 | |||||
Other current assets | 25,479 | 23,894 | |||||
Total current assets | 308,909 | 283,368 | |||||
Property, plant and equipment, net | 211,601 | 205,459 | |||||
Goodwill | 139,459 | 84,373 | |||||
Intangibles and other assets, net | 110,797 | 69,811 | |||||
Total assets | $ | 770,766 | $ | 643,011 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
Current liabilities: | |||||||
Current portion of capital leases | $ | 4 | $ | — | |||
Accounts payable, trade and other | 59,969 | 51,611 | |||||
Other current liabilities | 47,945 | 43,605 | |||||
Total current liabilities | 107,918 | 95,216 | |||||
Long-term debt and capital leases | 295,006 | 185,000 | |||||
Other long-term liabilities | 14,072 | 15,569 | |||||
Total liabilities | $ | 416,996 | $ | 295,785 | |||
Commitments and contingencies (note 14) | |||||||
Common stock, par value $.001 per share; authorized 100,000,000; issued 22,863,478 and 22,777,690; outstanding 19,528,932 and 19,455,011 shares | 20 | 19 | |||||
Paid-in capital | 136,598 | 134,694 | |||||
Common stock held in treasury, at cost (3,334,546 and 3,322,679 shares) | (175,789 | ) | (175,051 | ) | |||
Retained earnings | 394,645 | 389,048 | |||||
Accumulated other comprehensive loss | (1,704 | ) | (1,484 | ) | |||
Total stockholders' equity | 353,770 | 347,226 | |||||
Total liabilities and stockholders' equity | $ | 770,766 | $ | 643,011 | |||
See notes to condensed consolidated financial statements
Page 4 of 40
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(Dollars in thousands, except per share amounts, the number of shares or where otherwise noted)
Three months ended | Nine months ended | ||||||||||||||
September 30, 2017 | September 30, 2016 | September 30, 2017 | September 30, 2016 | ||||||||||||
Net sales | $ | 183,839 | $ | 186,037 | $ | 528,923 | $ | 557,555 | |||||||
Cost of goods sold | 142,870 | 145,497 | 412,335 | 440,149 | |||||||||||
Gross profit | 40,969 | 40,540 | 116,588 | 117,406 | |||||||||||
Operating expenses: | |||||||||||||||
Selling, general and administrative | 20,894 | 17,749 | 60,069 | 51,716 | |||||||||||
Research & development expenses | 1,065 | 896 | 2,713 | 2,913 | |||||||||||
Total operating expenses | 21,959 | 18,645 | 62,782 | 54,629 | |||||||||||
Operating income | 19,010 | 21,895 | 53,806 | 62,777 | |||||||||||
Interest expense, net | 1,630 | 1,915 | 4,435 | 5,627 | |||||||||||
Foreign exchange loss (gain) | 100 | 110 | (35 | ) | 426 | ||||||||||
Income before income taxes | 17,280 | 19,870 | 49,406 | 56,724 | |||||||||||
Provision for income taxes | 5,698 | 6,227 | 15,678 | 18,135 | |||||||||||
Net income | $ | 11,582 | $ | 13,643 | $ | 33,728 | $ | 38,589 | |||||||
Net income attributable to participating common shareholders | $ | 11,513 | $ | 13,548 | $ | 33,540 | $ | 38,356 | |||||||
Per share data (note 3): | |||||||||||||||
Income per participating share: | |||||||||||||||
Basic | $ | 0.59 | $ | 0.70 | $ | 1.73 | $ | 1.99 | |||||||
Diluted | $ | 0.58 | $ | 0.69 | $ | 1.70 | $ | 1.96 | |||||||
Weighted average participating shares outstanding: | |||||||||||||||
Basic | 19,412,474 | 19,294,070 | 19,395,317 | 19,255,143 | |||||||||||
Diluted | 19,699,052 | 19,670,159 | 19,695,530 | 19,572,003 | |||||||||||
Other comprehensive (loss) income, net of tax: | |||||||||||||||
Change in interest rate swaps, (net of tax of $31, ($126), ($22), and $143) | $ | (52 | ) | $ | 204 | $ | 35 | $ | (234 | ) | |||||
Change in pension and post-retirement plans, (net of tax of $43, ($24), $111, and $10) | (103 | ) | 78 | (255 | ) | (12 | ) | ||||||||
Other comprehensive loss, net of tax | $ | (155 | ) | $ | 282 | $ | (220 | ) | $ | (246 | ) | ||||
Comprehensive income | $ | 11,427 | $ | 13,925 | $ | 33,508 | $ | 38,343 | |||||||
See notes to condensed consolidated financial statements
Page 5 of 40
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
Nine months ended | |||||||
September 30, 2017 | September 30, 2016 | ||||||
Cash flows provided from operating activities | |||||||
Net income | $ | 33,728 | $ | 38,589 | |||
Adjustments to reconcile net income to net cash provided from operating activities: | |||||||
Depreciation and amortization | 29,009 | 28,607 | |||||
Amortization of deferred financing charges | 322 | 505 | |||||
Deferred income tax (benefit) provision | (14 | ) | 363 | ||||
Gain on sale of building | (153 | ) | — | ||||
Share-based compensation | 2,996 | 2,329 | |||||
Changes in assets and liabilities: | |||||||
Increase in accounts receivable | (13,024 | ) | (107 | ) | |||
Decrease in inventories | 2,873 | 33,092 | |||||
Decrease in other current assets | 151 | 2,102 | |||||
Decrease in accounts payable | (7,566 | ) | (2,545 | ) | |||
Increase (decrease) in other current liabilities | 1,666 | (16,145 | ) | ||||
Changes in other long-term assets and liabilities | (3,331 | ) | (4,986 | ) | |||
Net cash provided from operating activities | 46,657 | 81,804 | |||||
Cash flows used for investing activities: | |||||||
Capital expenditures | (24,650 | ) | (25,675 | ) | |||
Proceeds from sale of building | 1,028 | — | |||||
Acquisition of Novel Ingredients, net of cash acquired | (124,984 | ) | — | ||||
Net cash used for investing activities | (148,606 | ) | (25,675 | ) | |||
Cash flows provided by (used for) financing activities: | |||||||
Proceeds from exercise of stock options | — | 9 | |||||
Long-term debt borrowings | 146,000 | 36,000 | |||||
Long-term debt repayments | (36,000 | ) | (49,002 | ) | |||
Excess tax deficiency from exercise of stock options | — | (346 | ) | ||||
Restricted stock forfeitures | (738 | ) | (331 | ) | |||
Dividends paid | (28,095 | ) | (27,891 | ) | |||
Net cash provided by (used for) financing activities | 81,167 | (41,561 | ) | ||||
Effect of foreign exchange rate changes on cash and cash equivalents | 27 | 323 | |||||
Net change in cash | (20,755 | ) | 14,891 | ||||
Cash and cash equivalents at beginning of period | 53,487 | 17,905 | |||||
Cash and cash equivalents at end of period | $ | 32,732 | $ | 32,796 | |||
See notes to condensed consolidated financial statements
Page 6 of 40
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Statement of Stockholders’ Equity (Unaudited)
(Dollars and shares in thousands)
Number of Common Shares | Common Stock | Retained Earnings (Deficit) | Paid-in Capital / Treasury Stock | Accumulated Other Comprehensive Income/(Loss) | Total Shareholders' Equity | |||||||||||||||||
Balance, December 31, 2015 | 19,290 | $ | 19 | $ | 378,321 | $ | (42,286 | ) | $ | (2,794 | ) | $ | 333,260 | |||||||||
Net income | 47,971 | 47,971 | ||||||||||||||||||||
Other comprehensive income, (net of tax $(725)) | 1,310 | 1,310 | ||||||||||||||||||||
Proceeds from stock award exercises and issuances | 192 | (1,428 | ) | (1,428 | ) | |||||||||||||||||
Share-based compensation | 3,732 | 3,732 | ||||||||||||||||||||
Excess tax deficiency from exercise of stock options | (9 | ) | (9 | ) | ||||||||||||||||||
Restricted stock forfeitures | (27 | ) | (366 | ) | (366 | ) | ||||||||||||||||
Dividends declared | (37,244 | ) | (37,244 | ) | ||||||||||||||||||
Balance, December 31, 2016 | 19,455 | $ | 19 | $ | 389,048 | $ | (40,357 | ) | $ | (1,484 | ) | $ | 347,226 | |||||||||
Net income | 33,728 | 33,728 | ||||||||||||||||||||
Other comprehensive loss, (net of tax $89) | (220 | ) | (220 | ) | ||||||||||||||||||
Proceeds from stock award exercises and issuances | 87 | 1 | (1,092 | ) | (1,091 | ) | ||||||||||||||||
Share-based compensation | 2,996 | 2,996 | ||||||||||||||||||||
Restricted stock forfeitures | (13 | ) | (738 | ) | (738 | ) | ||||||||||||||||
Dividends declared | (28,131 | ) | (28,131 | ) | ||||||||||||||||||
Balance, September 30, 2017 | 19,529 | $ | 20 | $ | 394,645 | $ | (39,191 | ) | $ | (1,704 | ) | $ | 353,770 | |||||||||
See notes to condensed consolidated financial statements
Page 7 of 40
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share amounts, the number of shares or where otherwise noted)
1. Basis of Statement Presentation
Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements of Innophos have been prepared in accordance with generally accepted accounting principles in the United States of America (US GAAP) for interim financial reporting and do not include all disclosures required by US GAAP for annual financial reporting, and should be read in conjunction with the audited consolidated and combined financial statements of the Company at December 31, 2016 and for the three years then ended.
The accompanying unaudited condensed consolidated financial statements of the Company reflect all adjustments which management considers necessary for a fair statement of the results of operations for the interim periods and is subject to year-end adjustments. The results of operations for the interim periods are not necessarily indicative of the results for the full year. The December 31, 2016 condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by US GAAP.
Recently Issued Accounting Standards
Adopted
In July 2015, the FASB issued guidance which requires entities to measure most inventory “at the lower of cost and net realizable value (“NRV”),” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. Under the new guidance, inventory is “measured at the lower of cost and net realizable value,” which eliminates the need to determine replacement cost and evaluate whether it is above the ceiling (NRV) or below the floor (NRV less a normal profit margin). The guidance defines NRV as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” The guidance is effective for annual periods beginning after December 15, 2016, and interim periods therein. Early application is permitted. The adoption of this standard did not have a material impact on our financial position, results of operations and related disclosures.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends Accounting Standards Codification ("ASC") Topic 718, Compensation - Stock Compensation. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years and early adoption is permitted. The adoption of this standard did not have a material impact on our financial position, results of operations and related disclosures.
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. Under the new standard, goodwill impairment would be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. This ASU eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted on testing dates after January 1, 2017. We have elected to early adopt for testing dates after January 1, 2017 and the adoption of this standard did not have a material impact on our financial position, results of operations and related disclosures.
Issued but not yet adopted
In May 2014, the FASB issued guidance on revenue from contracts with customers that will supersede most current revenue recognition guidance, including industry-specific guidance. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. In July 2015, the FASB approved the deferral of the effective date of this guidance by one year (with an option to early adopt at the original effective date), making it effective for the interim and annual periods beginning on or after December 15, 2017. As a result, this guidance will be effective for the Company beginning in fiscal year 2018, with an option to early adopt in fiscal year 2017. The guidance permits the use of
Page 8 of 40
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
either a retrospective or modified retrospective transition method. We will adopt the standard using the modified retrospective transition method on January 1, 2018. Based on the results of the assessment performed to date, the Company has preliminarily concluded that revenues are expected to remain substantially unchanged from the current revenue recognition model. The Company will continue to assess the new standard and the potential impact to our financial position, results of operations and related disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous GAAP. ASU 2016-02 requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods) using a modified retrospective approach and early adoption is permitted. While we are continuing to assess the effect of adoption, we currently believe the most significant changes relate to the recognition of new right-of-use assets and lease liabilities on our balance sheet for railcar and tank operating leases. We will continue to evaluate the impact of adoption of the ASU on our financial position, results of operations and related disclosures.
In March 2016, the FASB issued ASU 2016-15, Clarification on Classification of Certain Cash Receipts and Cash Payments on the Statement of Cash Flows. ASU 2016-15 clarifies the classification of certain cash receipts and cash payments in the statement of cash flows, including debt prepayment or extinguishment costs, settlement of contingent consideration arising from a business combination, insurance settlement proceeds, and distributions from certain equity method investees. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. We are evaluating the impact of adopting this new accounting guidance on our consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which reduces the complexity in the accounting standards by allowing the recognition of current and deferred income taxes for an intra-entity asset transfer, other than inventory, when the transfer occurs. Historically, recognition of the income tax consequence was not recognized until the asset was sold to an outside party. This amendment should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. There are no new disclosure requirements. This ASU is effective for annual reporting periods beginning after December 15, 2017. Early adoption is permitted in the first interim period of 2017. We are currently in the process of evaluating the impact of adoption of the ASU on our financial position, results of operations and related disclosures.
In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash, which clarifies guidance on the classification and presentation of restricted cash in the statement of cash flows. Under the ASU, changes in restricted cash and restricted cash equivalents would be included along with those of cash and cash equivalents in the statement of cash flows. As a result, entities would no longer present transfers between cash/equivalents and restricted cash/equivalents in the statement of cash flows. In addition, a reconciliation between the balance sheet and the statement of cash flows would be disclosed when the balance sheet includes more than one line item for cash/equivalents and restricted cash/equivalents. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. We do not anticipate the adoption of the new accounting rules will have a material impact on our financial position, results of operations and related disclosures.
In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business, which narrows the existing definition of a business and provides a framework for evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or a business. The ASU requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities (collectively, the set) is not a business. To be considered a business, the set would need to include an input and a substantive process that together significantly contribute to the ability to create outputs. The standard also narrows the definition of outputs. The definition of a business affects areas of accounting such as acquisitions, disposals and goodwill. Under the new guidance, fewer acquired sets are expected to be considered businesses. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. We would apply this guidance to applicable transactions after the adoption date.
In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires that only the service cost component of net periodic benefit costs be recorded as compensation cost in the operating expense section of the income statement. All other components of net periodic benefit cost (interest cost, expected return on plan assets and amortization of net loss) will be presented in other income - net.
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INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
This standard update is effective beginning with the first quarter 2018 and must be applied retrospectively. We are evaluating the impact of adopting this new accounting guidance on our consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Stock Compensation - Scope of Modification Accounting, which requires all modifications to be accounted for as a modification unless the fair value, vesting conditions and classification of the award as equity or liability are the same as the classification of the original award immediately before the original award is modified. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017 and for interim periods therein. The adoption of this guidance is not expected to have a significant effect on our financial position, results of operations and related disclosures.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and hedging (Topic 815): Targeted improvements to accounting for hedging activities. This standard more closely aligns the results of cash flow and fair value hedge accounting with risk management activities through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results in the financial statements. This standard also addresses specific limitations in current GAAP by expanding hedge accounting for both nonfinancial and financial risk components and by refining the measurement of hedge results to better reflect an entity’s hedging strategies. Additionally, by aligning the timing of recognition of hedge results with the earnings effect of the hedged item for cash flow and net investment hedges, and by including the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is presented, the results of an entity’s hedging program and the cost of executing that program will be more visible to users of financial statements. The new standard is effective for annual reporting periods beginning after December 15, 2018 with early adoption permitted. We do not anticipate the adoption of this standard will have a material impact on our financial position, results of operations and related disclosures.
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INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
2. Acquisitions
On August 25, 2017, the Company acquired 100 percent of the outstanding shares of GenNx Novel Holding, Inc. (together with its direct and indirect wholly-owned subsidiaries, "Novel Ingredients"). Novel Ingredients was a privately-held specialty ingredients supplier of botanicals, proteins, amino acids and other healthy ingredients, as well as branded ingredient and custom formulated solutions, headquartered in East Hanover, NJ. The Company made a $125 million cash payment, subject to post-closing working capital adjustments, which was funded by borrowings under its existing credit facility. The addition of Novel Ingredients grows Innophos' Food, Health, and Nutrition ("FHN") portfolio, expanding its presence in high-growth nutrition end-markets and positioning the Company to more effectively develop innovative ingredient solutions that better serve its customers. Novel Ingredients serves attractive end-markets driven by health and wellness consumer trends such as immune health, sports nutrition, and cognitive health.
During the three months ended September 30, 2017, the Company's results of operations included revenues of $10.2 million and a $0.6 million net loss attributable to Novel Ingredients. Acquisition related costs of $2.4 million (excluding integration costs of $0.6 million) were expensed as incurred and were included in selling, general and administrative expenses.
The excess of purchase price over the fair value amounts assigned to the assets acquired and liabilities assumed represents the goodwill amount resulting from the acquisition and will be included in the Food, Health and Nutrition operating segment. The goodwill of $55.1 million arising from the acquisition consists of expected revenue and cost synergies, operational know-how, and acquired workforce.
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed (in thousands):
Novel Ingredients | |||
Cash | $ | 105 | |
Accounts receivable, net of allowances of $319 | 11,447 | ||
Inventory, including fair value adjustment of $4,300 | 23,121 | ||
Other current assets | 1,655 | ||
Property, plant and equipment | 4,261 | ||
Other non-current assets | 187 | ||
Goodwill | 55,086 | ||
Intangible assets | 52,900 | ||
Accounts payable | (15,854 | ) | |
Accrued expenses | (2,782 | ) | |
Deferred income taxes | (5,037 | ) | |
Total | $ | 125,089 | |
In preparing the preliminary fair value estimates of the intangible assets and certain tangible assets acquired, management consulted with an independent third party. The purchase price and related allocation to assets acquired and liabilities assumed is preliminary pending finalization of the fair values assigned to the intangible assets and the valuation of the working capital components acquired as of the acquisition date.
From previous asset acquisitions, Novel Ingredients has amortizable goodwill and intangible assets that will continue to provide tax amortization deductions in future years. However, the excess of purchase price over the corresponding tax basis resulting from this acquisition will not be deductible for tax purposes. In addition, Novel Ingredients has Net Operating Loss ("NOL") carryforwards that are expected to be utilized in future periods. The deferred income tax balances are preliminary pending management's final analysis and preparation of the final period tax return.
Page 11 of 40
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
The intangible assets acquired with Novel Ingredients include the following (in thousands):
Useful life (years) | Novel Ingredients | |||
Customer relationships | 20 | $ | 46,200 | |
Trade name | 5-10 | 6,700 | ||
$ | 52,900 | |||
The weighted average useful life (years) of the intangible assets included in the above table is 18.4 years. The weighted average useful life (years) of the trade names included in the above table is 7.5 years.
The following unaudited pro forma information has been prepared as if the acquisition had occurred on January 1, 2016 (amounts in thousands, excluding EPS figures). The unaudited pro forma results do not reflect any material adjustments, operating efficiencies and other synergies which may result from the consolidation of operations.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||
Revenues | $ | 196,873 | $ | 205,023 | $ | 588,331 | $ | 616,489 | ||||
Net income | $ | 9,229 | $ | 12,744 | $ | 31,165 | $ | 32,456 | ||||
Income per common share - Basic | $ | 0.48 | $ | 0.66 | $ | 1.61 | $ | 1.69 | ||||
Income per common share - Diluted | $ | 0.47 | $ | 0.65 | $ | 1.58 | $ | 1.66 | ||||
These amounts have been calculated after applying the Company's accounting policies and adjusting the results of Novel Ingredients to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had been applied on January 1, 2016. Interest expense related to the borrowing for the acquisition was applied on January 1, 2016. Depreciation and amortization of approximately $3.0 million and interest expense of approximately $2.6 million related to the above were included in the nine months ended September 30, 2017 and September 30, 2016. Further, the above pro forma amounts include a fair value adjustment to inventory of $4.3 million and was applied on January 1, 2016. The three and nine months ended September 30, 2017 include non-recurring transaction costs of approximately $2.4 million.
3. Earnings per Share (EPS)
The Company accounts for earnings per share in accordance with ASC 260, which requires two calculations of earnings per share (EPS) to be disclosed: basic EPS and diluted EPS. Under ASC Subtopic 260-10-45, unvested awards of share-based payments with rights to receive dividends or dividend equivalents, such as our restricted stock, are considered participating securities for purposes of calculating EPS. Under the two-class method, a portion of net income is allocated to these participating securities and therefore is excluded from the calculation of EPS allocated to common stock, as shown in the table below.
The numerator for basic and diluted earnings per share is net earnings attributable to shareholders reduced by dividends attributable to unvested shares. The denominator for basic earnings per share is the weighted average number of common stock outstanding during the period. The denominator for diluted earnings per share is weighted average shares outstanding adjusted for the effect of dilutive outstanding stock options, performance share awards and restricted stock awards.
Page 12 of 40
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
The following is a reconciliation of the weighted average basic number of common shares outstanding to the diluted number of common and common stock equivalent shares outstanding and the calculation of earnings per share using the two-class method:
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, 2017 | September 30, 2016 | September 30, 2017 | September 30, 2016 | ||||||||||||
Net income | $ | 11,582 | $ | 13,643 | $ | 33,728 | $ | 38,589 | |||||||
Less: earnings attributable to unvested shares | (69 | ) | (95 | ) | (188 | ) | (233 | ) | |||||||
Net income available to participating common shareholders | $ | 11,513 | $ | 13,548 | $ | 33,540 | $ | 38,356 | |||||||
Weighted average number of participating common and potential common shares outstanding: | |||||||||||||||
Basic number of participating common shares outstanding | 19,412,474 | 19,294,070 | 19,395,317 | 19,255,143 | |||||||||||
Dilutive effect of stock equivalents | 286,578 | 376,089 | 300,213 | 316,860 | |||||||||||
Diluted number of weighted average participating common shares outstanding | 19,699,052 | 19,670,159 | 19,695,530 | 19,572,003 | |||||||||||
Earnings per participating common share: | |||||||||||||||
Earnings per participating common share—Basic | $ | 0.59 | $ | 0.70 | $ | 1.73 | $ | 1.99 | |||||||
Earnings per participating common share—Diluted | $ | 0.58 | $ | 0.69 | $ | 1.70 | $ | 1.96 | |||||||
Total outstanding options, performance share awards and unvested restricted stock not included in the calculation of diluted earnings per share as the effect would be anti-dilutive | 395,850 | 461,193 | 382,215 | 520,422 | |||||||||||
4. Dividends
The following is the dividend activity for the three and nine months ended September 30, 2017 and September 30, 2016:
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30 | September 30 | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Dividends declared – per share | $ | 0.48 | $ | 0.48 | $ | 1.44 | $ | 1.44 | |||||||
Dividends declared – aggregate | 9,373 | 9,327 | 28,095 | 27,891 | |||||||||||
Dividends paid – per share | 0.48 | 0.48 | 1.44 | 1.44 | |||||||||||
Dividends paid – aggregate | 9,373 | 9,327 | 28,095 | 27,891 | |||||||||||
Innophos Holdings, Inc. is a holding company that does not conduct any business operations of its own. As a result, it is dependent upon cash dividends, distributions and other transfers from its subsidiaries, most directly Innophos, Inc., its primary operating subsidiary, and Innophos Investments Holdings, Inc., a direct, wholly-owned subsidiary of Innophos Holdings, Inc. and the parent of Innophos, Inc., to make dividend payments on its common stock.
Page 13 of 40
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
5. Stockholders’ Equity / Stock-Based Compensation
Restricted Stock
In April and May 2017, there were a total of 30,612 restricted shares granted to certain employees with a fair value of $1.6 million. These awards are classified as equity awards and vest annually over three years. The related compensation expense is based on the date of grant share prices of $52.51 and $48.42 for April and May, respectively. The compensation expense is amortized on a straight-line basis over the requisite vesting period and accelerated for those employees that are retirement eligible during the vesting period.
Stock Options
In April and May 2017, the Company granted a total of 102,607 non-qualified stock options at exercise prices of $52.51 and $48.42 for April and May, respectively, to certain employees with a fair value of $1.2 million. The non-qualified stock options vest annually over three years with April 3, 2027 and May 1, 2027 expiration dates.
The fair values of the options granted in 2017 were determined using the Black-Scholes option-pricing model. The blended assumptions used in the Black-Scholes option-pricing model were as follows for the April 3, 2017 and May 1, 2017 grants:
Non-qualified stock options | ||||
Expected Volatility | 31.3 | % | ||
Dividend Yield | 3.6 | % | ||
Risk-free interest rate | 2.09 | % | ||
Expected term (years) | 6.6 | |||
Weighted average grant date fair value of stock options | $ | 11.54 | ||
For the 2017 grants, the expected volatility and the expected term are based on the Company's historical data. The dividend yield is the expected annual dividend payments divided by the average stock price since announcement of the latest dividend up to the date of grant. The risk-free interest rates are derived from the U.S. Treasury securities in effect on the date of grant whose maturity period equals the options expected term. The Company applies an expected forfeiture rate to stock-based compensation expense. The estimate of the forfeiture rate is based primarily upon historical experience of employee turnover. As actual forfeitures become known, stock-based compensation expense is adjusted accordingly.
Performance Share Awards
In April and May 2017, the Company granted 22,958 performance shares to certain employees with a fair value of $1.3 million. The performance shares vest at the end of the three years performance cycle and the number of shares distributable depends on the extent to which the Company attains pre-established performance goals. Amounts equivalent to declared dividends will accrue on the performance shares and will vest over the same period.
Stock Grants
In May 2017, the seven external members of the Board of Directors were granted a combined total of 13,916 shares of the Company's common stock with an aggregated fair value of approximately $0.6 million which immediately vested as part of their director fees.
Page 14 of 40
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
The following table summarizes the components of stock-based compensation expense, all of which has been classified as selling, general and administrative expense:
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, 2017 | September 30, 2016 | September 30, 2017 | September 30, 2016 | ||||||||||||
Stock options | $ | 221 | $ | 354 | $ | 825 | $ | 439 | |||||||
Restricted stock | 378 | 497 | 1,290 | 837 | |||||||||||
Performance shares | 112 | 177 | 251 | 458 | |||||||||||
Stock grants | — | — | 630 | 595 | |||||||||||
Total share-based compensation expense (a) | $ | 711 | $ | 1,028 | $ | 2,996 | $ | 2,329 | |||||||
(a) The nine months ended September 30, 2016 includes a benefit of $524 for a change in estimate due to restructuring activities.
6. Inventories
Inventories consist of the following:
September 30, 2017 | December 31, 2016 | ||||||
Raw materials | $ | 45,501 | $ | 33,185 | |||
Finished products | 89,079 | 81,369 | |||||
Spare parts | 13,956 | 13,741 | |||||
$ | 148,536 | $ | 128,295 | ||||
Inventory reserves for excess quantities, obsolescence or shelf-life expiration as of September 30, 2017 and December 31, 2016 were $18,544 and $13,422, respectively.
7. Other Current Assets
Other current assets consist of the following:
September 30, 2017 | December 31, 2016 | ||||||
Creditable taxes (value added taxes) | $ | 8,053 | $ | 9,722 | |||
Vendor inventory deposits (prepaid) | 8,902 | 3,750 | |||||
Prepaid income taxes | 4,036 | 4,659 | |||||
Prepaid insurance | 2,126 | 2,248 | |||||
Other | 2,362 | 3,515 | |||||
$ | 25,479 | $ | 23,894 | ||||
Page 15 of 40
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
8. Goodwill
The following table provides a reconciliation of the carrying amount of goodwill at the beginning and end of the reporting period (in thousands):
Food, Health and Nutrition | Industrial Specialties | Other | Total | |||||||||
Balance: January 1, 2017 | $ | 61,090 | $ | 23,283 | $ | — | $ | 84,373 | ||||
Add: Goodwill from acquisition | 55,086 | — | — | 55,086 | ||||||||
Balance: September 30, 2017 | $ | 116,176 | $ | 23,283 | $ | — | $ | 139,459 | ||||
9. Intangibles and Other Assets, net
Intangibles and other assets consist of the following:
Useful life (years) | September 30, 2017 | December 31, 2016 | |||||||
Developed technology and application patents, net of accumulated amortization of $29,891 for 2017 and $27,778 for 2016 | 7-20 | $ | 16,294 | $ | 18,497 | ||||
Customer relationships, net of accumulated amortization of $20,881 for 2017 and $18,569 for 2016 | 5-20 | 64,131 | 20,243 | ||||||
Trade names and license agreements, net of accumulated amortization of $11,410 for 2017 and $10,315 for 2016 | 5-20 | 12,951 | 7,346 | ||||||
Non-compete agreements, net of accumulated amortization of $1,287 for 2017 and $1,268 for 2016 | 3-10 | 46 | 65 | ||||||
Total intangibles | $ | 93,422 | $ | 46,151 | |||||
Deferred income taxes | $ | 13,430 | $ | 18,432 | |||||
Deferred financing costs, net of accumulated amortization of $3,795 for 2017 and $3,473 for 2016 (see note 11) | 1,828 | 2,150 | |||||||
Other tax assets | — | 997 | |||||||
Other assets | 2,117 | 2,081 | |||||||
Total other assets | $ | 17,375 | $ | 23,660 | |||||
$ | 110,797 | $ | 69,811 | ||||||
10. Other Current Liabilities
Other current liabilities consist of the following:
September 30, 2017 | December 31, 2016 | ||||||
Payroll related | $ | 13,696 | $ | 11,852 | |||
Taxes other than income taxes | 1,652 | 2,624 | |||||
Benefits and pensions | 5,687 | 5,419 | |||||
Freight and rebates | 3,754 | 3,579 | |||||
Income taxes | 11,695 | 9,278 | |||||
Restructuring and management transition reserve | 2,165 | 4,737 | |||||
Other | 9,296 | 6,116 | |||||
$ | 47,945 | $ | 43,605 | ||||
Page 16 of 40
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
11. Short-Term Borrowings, Long-Term Debt, and Interest Expense
Short-term borrowings and long-term debt consist of the following:
September 30, 2017 | December 31, 2016 | ||||||
Revolver borrowings under the credit facility due 2021 | $ | 295,000 | $ | 185,000 | |||
Capital leases | 10 | — | |||||
Total borrowings | $ | 295,010 | $ | 185,000 | |||
Less current portion of capital leases | 4 | — | |||||
Long-term debt | $ | 295,006 | $ | 185,000 | |||
The Company's credit facility includes a revolving line of credit from the lenders of up to $450.0 million, including a $20.0 million letter of credit sub-facility and a $20.0 million swingline loan facility, all maturing on December 22, 2021. The credit agreement governing this facility also provides for possible additional revolving indebtedness under an incremental facility of up to $150.0 million (for an aggregate of revolving capacity up to $600.0 million) upon future request by the Company to existing lenders (and depending on their consent) or from other willing financial institutions invited by the Company and reasonably acceptable to the administrative agent to join in the credit agreement. This revolving credit facility increase, if implemented, may provide for higher applicable margins to either the increased portion or possibly the entire revolving credit facility, with limitations, than those in effect for the original revolving commitments under the credit agreement.
As of September 30, 2017, $295.0 million was outstanding under the revolving line of credit, which approximates fair value (determined using level 2 inputs within the fair value hierarchy) with total availability at $153.9 million, taking into account $1.1 million in face amount of letters of credit issued under the sub-facility. The current weighted average interest rate for all debt is 2.8%.
Among its affirmative covenants, the credit agreement governing this credit facility requires the Company to maintain the following consolidated ratios (as defined and calculated according to the credit agreement) as of the end of each fiscal quarter:
(a) “Total Leverage Ratio” less than or equal to 3.50 to 1.00.
(b) “Interest Coverage Ratio” greater than or equal to 3.00 to 1.00.
As of September 30, 2017, the Company was in full compliance with all debt covenant requirements.
In December 2012, Innophos entered into an interest rate swap, swapping the LIBOR exposure on $100.0 million floating rate debt, which is currently outstanding under the credit agreement, to a fixed rate to maturity obligation of 0.9475% expiring in December 2017. This interest rate swap has been designated as a cash flow hedge (Level 2) with the changes in value recorded through other comprehensive income. The fair value of this interest rate swap of approximately $0.1 million is recorded in other long-term assets as of September 30, 2017. Based on $195.0 million outstanding borrowings as floating rate debt (amount not covered by the swap), an immediate increase of one percentage point would cause an increase to interest expense of approximately $2.0 million per year.
We manage our interest rate risk by balancing the amount of fixed-rate and floating-rate debt to the extent practicable consistent with our credit status.
Total interest paid by the Company for all indebtedness for the nine months ended September 30, 2017 and September 30, 2016 was $4.3 million and $5.3 million, respectively.
Page 17 of 40
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
Interest expense, net consists of the following:
Three months ended | Nine months ended | ||||||||||||||
September 30, 2017 | September 30, 2016 | September 30, 2017 | September 30, 2016 | ||||||||||||
Interest expense | $ | 1,667 | $ | 1,796 | $ | 4,432 | $ | 5,297 | |||||||
Deferred financing cost | 107 | 168 | 322 | 505 | |||||||||||
Interest income | (21 | ) | (14 | ) | (41 | ) | (38 | ) | |||||||
Less: amount capitalized for capital projects | (123 | ) | (35 | ) | (278 | ) | (137 | ) | |||||||
Total interest expense, net | $ | 1,630 | $ | 1,915 | $ | 4,435 | $ | 5,627 | |||||||
12. Other Long-Term Liabilities
Other long-term liabilities consist of the following:
September 30, 2017 | December 31, 2016 | ||||||
Deferred income taxes | $ | 467 | $ | 1,282 | |||
Pension and post retirement liabilities | 8,979 | 7,689 | |||||
Restructuring and management transition reserve | 210 | 1,618 | |||||
Uncertain tax positions | 1,974 | 1,974 | |||||
Environmental liabilities | 1,100 | 1,100 | |||||
Other liabilities | 1,342 | 1,906 | |||||
$ | 14,072 | $ | 15,569 | ||||
13. Income Taxes
The effective income tax rate on income before taxes was approximately 32% for the nine months ended September 30, 2017 compared to approximately 32% for the comparable period in 2016. The change in the components of the effective tax rate are primarily due to the adoption of ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, changing the accounting for tax benefits from stock option exercises and vesting of restricted stock and performance awards, which decreased the effective tax rate by 2%, a permanent adjustment attributable to an inventory obsolescence reserve in Mexico in the prior year, which decreased the effective tax rate by 1% as compared to last year and prior year tax return true-ups which increased the effective tax rate by 3% as compared to last year.
Business is conducted in various countries throughout the world and is subject to tax in numerous jurisdictions. A significant number of tax returns are filed and subject to examination by various federal, state and local tax authorities. Tax examinations are often complex, as tax authorities may disagree with the treatment of items reported requiring several years to resolve. As such, the Company maintains liabilities for possible assessments by tax authorities resulting from known tax exposures for uncertain income tax positions. The Company’s policy is to accrue associated penalties in selling, general and administrative expenses and to accrue interest in net interest expense. Currently, the Company is under examination, or has been contacted for examination on income tax returns, for the years 2009 through 2015. Also, certain state income tax assessments are under protest and the Company believes its financial position is sustainable. The Company estimates the liability for unrecognized tax benefits may decrease by approximately $0.7 million during the next twelve months as a result of possible settlements of income tax authority examinations. Other than the items mentioned above, as of September 30, 2017, no material adjustments have been proposed to the Company's tax positions and the Company currently does not anticipate any adjustments that would result in a material change to its financial position during the next twelve months.
Income taxes paid were $14.0 million and $34.8 million for the nine months ended September 30, 2017 and September 30, 2016, respectively.
Page 18 of 40
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
14. Commitments and Contingencies
Environmental
The Company's operations are subject to extensive and changing federal, state, local and international environmental laws, rules and regulations. The Company's manufacturing sites have an extended history of industrial use, and soil and groundwater contamination have or may have occurred in the past and might occur or be discovered in the future.
Environmental efforts are difficult to assess for numerous reasons, including the discovery of new remedial sites, discovery of new information and scarcity of reliable information pertaining to certain sites, improvements in technology, changes in environmental laws and regulations, numerous possible remedial techniques and solutions, difficulty in assessing the involvement of and the financial capability of other potentially responsible parties and the extended time periods over which remediation occurs. Other than the items listed below, the Company is not aware of material environmental liabilities which are probable and estimable. As the Company's environmental contingencies are more clearly determined, it is reasonably possible that amounts may need to be accrued. However, management does not believe, based on current information, that environmental remediation requirements will have a material impact on the Company's results of operations, financial position or cash flows.
Future environmental spending is probable at our site in Nashville, TN, the eastern portion of which had been used historically as a landfill, and a western parcel therein, previously acquired from a third party, which reportedly had housed, but no longer does, a fertilizer and pesticide manufacturing facility. We have an estimated liability with a range of $0.9 million-$1.3 million. The remedial action plan for that site has yet to be finalized, and as such, the Company has recorded a liability, which represents the Company's best estimate, of $1.1 million as of September 30, 2017.
Litigation
2008 RCRA Civil Enforcement - Geismar, Louisiana plant
On January 12, 2017, the Company entered into a settlement with the United States Environmental Protection Agency, or EPA, and the Louisiana Department of Environmental Quality, or LDEQ, with respect to certain manufacturing processes at the Company’s Geismar, Louisiana plant, including the Company’s handling of (i) filter material from an enclosed intermediate filtration step to further process merchant green phosphoric acid, or MGA, that the Company receives as raw material via pipeline from the adjacent site operated by PCS and (ii) the Company’s raffinate co-product that is separated in connection with its PPA production at the plant. The EPA and LDEQ, collectively with the United States Department of Justice, or DOJ, are collectively referred to as the Government Parties. This settlement resulted from years of negotiations between the Company and the Government Parties following inspections of the plant by the Government Parties in which they raised certain violations of the federal Resource, Conservation and Recovery Act. Prior to this settlement, in the course of discussions with the Government Parties, the EPA and the DOJ required that the Company undertake, as an interim measure, the construction of a new filter unit to replace the enclosed system and allow the removal and separate handling of the filter material. The Company built that unit, which has been operating since 2012. As part of the settlement, Innophos is implementing a deep well injection system, a solution approved by the EPA and LDEQ to handle the raffinate separated at the plant. Such system is expected to be completed by early 2018. The Company previously returned the raffinate to PCS under a long-term contract it has with PCS and can continue to do so until the Company receives the necessary approvals and permits to operate its deep well system. In connection with this settlement, the Company will pay a $1.4 million civil penalty, which is accrued in other current liabilities. The consent decree relating to this settlement was entered by the United States District Court for the Middle District of Louisiana on October 4, 2017. As such, the Company will pay the $1.4 million civil penalty on November 1, 2017.
Other Legal Matters
In addition, we are party to legal proceedings and contractual disputes that arise in the ordinary course of our business. Except as to the matters specifically discussed, management believes the likelihood that the ultimate disposition of these matters will have a material adverse effect on our business, results of operations, financial condition and/or cash flows is remote. However, these matters cannot be predicted with certainty and an unfavorable resolution of one or more of them could have a material adverse effect on our business, results of operations, financial condition, and/or cash flows.
Page 19 of 40
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
15. Pension Plans and Postretirement Benefits
Net periodic benefit expense for the United States plans:
For the three months ended September 30, 2017 | For the three months ended September 30, 2016 | ||||||||||||||||||||||
Pension benefits | Other benefits | Total | Pension benefits | Other benefits | Total | ||||||||||||||||||
Service cost | $ | — | $ | 34 | $ | 34 | $ | — | $ | 46 | $ | 46 | |||||||||||
Interest cost | 25 | 31 | 56 | 30 | 44 | 74 | |||||||||||||||||
Expected return on assets | (35 | ) | — | (35 | ) | (37 | ) | — | (37 | ) | |||||||||||||
Amortization of | |||||||||||||||||||||||
prior service cost | — | — | — | — | — | — | |||||||||||||||||
unrecognized (gain) loss | — | (50 | ) | (50 | ) | 2 | (13 | ) | (11 | ) | |||||||||||||
net transition obligation | — | — | — | — | — | — | |||||||||||||||||
Net periodic cost | $ | (10 | ) | $ | 15 | $ | 5 | $ | (5 | ) | $ | 77 | $ | 72 | |||||||||
For the nine months ended September 30, 2017 | For the nine months ended September 30, 2016 | ||||||||||||||||||||||
Pension benefits | Other benefits | Total | Pension benefits | Other benefits | Total | ||||||||||||||||||
Service cost | $ | — | $ | 101 | $ | 101 | $ | — | $ | 138 | $ | 138 | |||||||||||
Interest cost | 76 | 92 | 168 | 89 | 133 | 222 | |||||||||||||||||
Expected return on assets | (105 | ) | — | (105 | ) | (109 | ) | — | (109 | ) | |||||||||||||
Amortization of | |||||||||||||||||||||||
prior service cost | — | — | — | — | — | — | |||||||||||||||||
unrecognized (gain) loss | — | (149 | ) | (149 | ) | 6 | (39 | ) | (33 | ) | |||||||||||||
net transition obligation | — | — | — | — | — | — | |||||||||||||||||
Net periodic cost | $ | (29 | ) | $ | 44 | $ | 15 | $ | (14 | ) | $ | 232 | $ | 218 | |||||||||
Innophos has no minimum contribution requirements and does not plan to make cash contributions for its US defined benefit pension plan in 2017.
Innophos made its entire cash contribution of $2.9 million for the US defined contribution plan during the first quarter of 2017 for the plan year 2016.
Page 20 of 40
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
Net periodic benefit expense for the Canadian plans:
For the three months ended September 30, 2017 | For the three months ended September 30, 2016 | ||||||||||||||||||||||
Pension benefits | Other benefits | Total | Pension benefits | Other benefits | Total | ||||||||||||||||||
Service cost | $ | 98 | $ | 13 | $ | 111 | $ | 92 | $ | 12 | $ | 104 | |||||||||||
Interest cost | 132 | 14 | 146 | 125 | 13 | 138 | |||||||||||||||||
Expected return on assets | (209 | ) | — | (209 | ) | (195 | ) | — | (195 | ) | |||||||||||||
Amortization of | |||||||||||||||||||||||
actuarial loss (gain) | 45 | — | 45 | 53 | — | 53 | |||||||||||||||||
prior service cost | 27 | — | 27 | 26 | — | 26 | |||||||||||||||||
net transition obligation | — | 6 | 6 | — | 6 | 6 | |||||||||||||||||
Exchange rate changes | (53 | ) | 18 | (35 | ) | 29 | (9 | ) | 20 | ||||||||||||||
Net periodic cost | $ | 40 | $ | 51 | $ | 91 | $ | 130 | $ | 22 | $ | 152 | |||||||||||
For the nine months ended September 30, 2017 | For the nine months ended September 30, 2016 | ||||||||||||||||||||||
Pension benefits | Other benefits | Total | Pension benefits | Other benefits | Total | ||||||||||||||||||
Service cost | $ | 285 | $ | 38 | $ | 323 | $ | 272 | $ | 36 | $ | 308 | |||||||||||
Interest cost | 384 | 41 | 425 | 368 | 39 | 407 | |||||||||||||||||
Expected return on assets | (609 | ) | — | (609 | ) | (577 | ) | — | (577 | ) | |||||||||||||
Amortization of | |||||||||||||||||||||||
actuarial loss (gain) | 131 | — | 131 | 156 | — | 156 | |||||||||||||||||
prior service cost | 80 | — | 80 | 79 | — | 79 | |||||||||||||||||
net transition obligation | — | 17 | 17 | — | 17 | 17 | |||||||||||||||||
Exchange rate changes | (199 | ) | 63 | (136 | ) | (271 | ) | 68 | (203 | ) | |||||||||||||
Net periodic cost | $ | 72 | $ | 159 | $ | 231 | $ | 27 | $ | 160 | $ | 187 | |||||||||||
Innophos Canada, Inc. plans to make cash contributions to its Canadian defined benefit plan of approximately $0.5 million in 2017.
Page 21 of 40
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
16. Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) by Component:
For the three months ended September 30, 2017 | Pension and Other Postretirement Adjustments | Changes in Fair Value of Effective Cash Flow Hedges | Total | ||||||||
Balance at June 30, 2017 | $ | (1,645 | ) | $ | 96 | $ | (1,549 | ) | |||
Other comprehensive loss before reclassifications | (103 | ) | (52 | ) | (155 | ) | |||||
Amounts reclassified from accumulated other comprehensive income | — | — | — | ||||||||
Net current period other comprehensive loss | (103 | ) | (52 | ) | (155 | ) | |||||
Balance at September 30, 2017 | $ | (1,748 | ) | $ | 44 | $ | (1,704 | ) | |||
For the three months ended September 30, 2016 | Pension and Other Postretirement Adjustments | Changes in Fair Value of Effective Cash Flow Hedges | Total | ||||||||
Balance at June 30, 2016 | $ | (2,932 | ) | $ | (390 | ) | $ | (3,322 | ) | ||
Other comprehensive income (loss) before reclassifications | 78 | 204 | 282 | ||||||||
Amounts reclassified from accumulated other comprehensive income | — | — | — | ||||||||
Net current period other comprehensive income (loss) | 78 | 204 | 282 | ||||||||
Balance at September 30, 2016 | $ | (2,854 | ) | $ | (186 | ) | $ | (3,040 | ) | ||
For the nine months ended September 30, 2017 | Pension and Other Postretirement Adjustments | Changes in Fair Value of Effective Cash Flow Hedges | Total | ||||||||
Balance at December 31, 2016 | $ | (1,493 | ) | $ | 9 | $ | (1,484 | ) | |||
Other comprehensive (loss) income before reclassifications | (255 | ) | 35 | (220 | ) | ||||||
Amounts reclassified from accumulated other comprehensive income | — | — | — | ||||||||
Net current period other comprehensive (loss) income | (255 | ) | 35 | (220 | ) | ||||||
Balance at September 30, 2017 | $ | (1,748 | ) | $ | 44 | $ | (1,704 | ) | |||
For the nine months ended September 30, 2016 | Pension and Other Postretirement Adjustments | Changes in Fair Value of Effective Cash Flow Hedges | Total | ||||||||
Balance at December 31, 2015 | $ | (2,842 | ) | $ | 48 | $ | (2,794 | ) | |||
Other comprehensive loss before reclassifications | (12 | ) | (234 | ) | (246 | ) | |||||
Amounts reclassified from accumulated other comprehensive income | — | — | — | ||||||||
Net current period other comprehensive loss | (12 | ) | (234 | ) | (246 | ) | |||||
Balance at September 30, 2016 | $ | (2,854 | ) | $ | (186 | ) | $ | (3,040 | ) | ||
Page 22 of 40
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
17. Restructuring Costs
During 2015 management evaluated several initiatives to improve the overall operating efficiency of the organization. As a result of this evaluation we launched an initiative to reduce our cost structure by implementing various staff reduction actions during the third quarter of 2015.
In addition, during the fourth quarter of 2015, the Company experienced a management transition of certain high-level positions, most notably the Chief Executive Officer and the Chief Financial Officer.
The following table summarizes the fiscal year 2017 activities related to these restructuring initiatives for severance and benefits:
For the three months ended September 30, 2017 | Restructuring Costs | ||
Balance at June 30, 2017 | $ | 3,136 | |
Expense recorded | — | ||
Payments made | (761 | ) | |
Balance at September 30, 2017 | $ | 2,375 | |
For the nine months ended September 30, 2017 | Restructuring Costs | ||
Balance at December 31, 2016 | $ | 6,356 | |
Expense recorded | — | ||
Payments made | (3,981 | ) | |
Balance at September 30, 2017 | $ | 2,375 | |
Page 23 of 40
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
18. Segment Reporting
The Company discloses certain financial and supplementary information about its reportable segments, revenue by products and revenues by geographic area. Operating segments are defined as components of an enterprise about which separate discrete financial information is evaluated regularly by the chief operating decision maker, in order to decide how to allocate resources and assess performance. The primary performance indicators for the chief operating decision maker are sales and EBITDA (defined as net income (loss) before interest, income taxes, depreciation and amortization). All references to sales in this Quarterly Report on Form 10-Q are recognized when title and risk of loss passes to the customer, which occurs either upon shipment or delivery, depending upon the agreed sales terms with customers.
The Company's chief executive officer is the chief operating decision maker and, as of the first quarter of 2017, has determined to assess the Company's performance and allocate the appropriate resources based on the following operating segments: (1) Food, Health and Nutrition, (2) Industrial Specialties and (3) Other. The new reporting segments accurately reflect the underlying business dynamics and align with the strategic direction of the Company. Prior to the first quarter of 2017, the reporting segments were (1) Specialty Phosphates US & Canada, (2) Specialty Phosphates Mexico and (3) Granular Triple Super Phosphate, or GTSP & Other, versus the current market view.
For the three months ended September 30, 2017 | Food, Health and Nutrition | Industrial Specialties | Other | Total | ||||||||||||
Sales | $ | 98,276 | $ | 67,682 | $ | 17,881 | $ | 183,839 | ||||||||
EBITDA | $ | 16,442 | $ | 13,491 | $ | (1,145 | ) | $ | 28,788 | |||||||
Depreciation and amortization expense | $ | 5,664 | $ | 3,488 | $ | 726 | $ | 9,878 | ||||||||
For the three months ended September 30, 2016 | Food, Health and Nutrition | Industrial Specialties | Other | Total | ||||||||||||
Sales | $ | 93,586 | $ | 70,124 | $ | 22,327 | $ | 186,037 | ||||||||
EBITDA | $ | 19,649 | $ | 10,237 | $ | 1,942 | $ | 31,828 | ||||||||
Depreciation and amortization expense | $ | 5,802 | $ | 2,957 | $ | 1,284 | $ | 10,043 | ||||||||
For the nine months ended September 30, 2017 | Food, Health and Nutrition | Industrial Specialties | Other | Total | ||||||||||||
Sales | $ | 281,558 | $ | 198,721 | $ | 48,644 | $ | 528,923 | ||||||||
EBITDA | $ | 49,098 | $ | 31,666 | $ | 2,086 | $ | 82,850 | ||||||||
Depreciation and amortization expense | $ | 16,884 | $ | 10,346 | $ | 1,779 | $ | 29,009 | ||||||||
For the nine months ended September 30, 2016 | Food, Health and Nutrition | Industrial Specialties | Other | Total | ||||||||||||
Sales | $ | 286,660 | $ | 216,591 | $ | 54,304 | $ | 557,555 | ||||||||
EBITDA | $ | 59,326 | $ | 29,934 | $ | 1,698 | $ | 90,958 | ||||||||
Depreciation and amortization expense | $ | 15,845 | $ | 9,554 | $ | 3,208 | $ | 28,607 | ||||||||
Page 24 of 40
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
A reconciliation of net income to EBITDA follows:
Three months ended | ||||||||
September 30, 2017 | September 30, 2016 | |||||||
Net income | $ | 11,582 | $ | 13,643 | ||||
Provision for income taxes | 5,698 | 6,227 | ||||||
Interest expense, net | 1,630 | 1,915 | ||||||
Depreciation and amortization | 9,878 | 10,043 | ||||||
EBITDA | $ | 28,788 | $ | 31,828 | ||||
Nine months ended | ||||||||
September 30, 2017 | September 30, 2016 | |||||||
Net income | $ | 33,728 | $ | 38,589 | ||||
Provision for income taxes | 15,678 | 18,135 | ||||||
Interest expense, net | 4,435 | 5,627 | ||||||
Depreciation and amortization | 29,009 | 28,607 | ||||||
EBITDA | $ | 82,850 | $ | 90,958 | ||||
Total assets by segment | Food, Health and Nutrition | Industrial Specialties | Other | Total | ||||||||||||
For the period ended September 30, 2017 (a) | $ | 534,641 | $ | 203,633 | $ | 32,492 | $ | 770,766 | ||||||||
For the period ended September 30, 2016 | 397,575 | 210,680 | 34,756 | 643,011 | ||||||||||||
(a) Food, Health and Nutrition increased by $148.2 million with the acquisition of Novel Ingredients.
Page 25 of 40
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Innophos is a leading international producer of specialty ingredient solutions that deliver versatile benefits for the food, health, nutrition and industrial markets. Innophos combines more than a century of experience in specialty phosphate manufacturing with a broad range of other specialty nutritional ingredients. Many of Innophos' products are application-specific compounds engineered to meet customer performance requirements and are often critical to the taste, texture and performance of foods, beverages, pharmaceuticals, oral care products and other applications. For example, Innophos products act as flavor enhancers in beverages, electrolytes in sports drinks, texture additives in cheeses, leavening agents in baked goods, pharmaceutical excipients, cleaning agents in toothpaste, and they also provide a wide range of nutritional fortification solutions for food, beverage and nutritional supplement manufacturers.
Full Year 2017 Outlook
The 2017 fiscal year includes the contributions from Novel Ingredients in both Q3 and Q4 with estimated sales of $35 million.
Q4 is expected to reflect typical seasonality with lower sequential sales and unfavorable mix.
Demand impact from the recent natural disasters is expected to carry into Q4 and forecasted to have an unfavorable $3 million effect on sales for the full year.
An estimated $3 million of Phase 2 Operational Excellence savings will take effect in 2017, $2 million of which will be recorded in Q4. Near term logistics savings are being impacted by lack of trucking equipment availability following recent hurricanes.
The Company is planning a manufacturing stoppage in Q4 as a first step in a broader plant maintenance and supply chain optimization program that will be phased throughout 2018, demonstrating our continued commitment to our phosphates product portfolio. This stoppage will impact earnings adversely by approximately $4 million due to maintenance expense, lower fixed costs absorption and higher cost of externally sourced material.
Page 26 of 40
Results of Operations
The following table sets forth a summary of the Company’s operations and their percentages of total revenue for the periods indicated (dollars in millions):
Three Months Ended | Three Months Ended | ||||||||||||
September 30, 2017 | September 30, 2016 | ||||||||||||
Amount | % | Amount | % | ||||||||||
Net sales | $ | 183.8 | 100.0 | $ | 186.0 | 100.0 | |||||||
Cost of goods sold | 142.8 | 77.7 | 145.5 | 78.2 | |||||||||
Gross profit | 41.0 | 22.3 | 40.5 | 21.8 | |||||||||
Operating expenses: | |||||||||||||
Selling, general and administrative | 20.9 | 11.4 | 17.7 | 9.5 | |||||||||
Research & development | 1.1 | 0.6 | 0.9 | 0.5 | |||||||||
Income from operations | 19.0 | 10.3 | 21.9 | 11.8 | |||||||||
Interest expense, net | 1.6 | 0.9 | 1.9 | 1.0 | |||||||||
Foreign exchange loss, net | 0.1 | 0.1 | 0.1 | 0.1 | |||||||||
Provision for income taxes | 5.7 | 3.1 | 6.3 | 3.4 | |||||||||
Net income | $ | 11.6 | 6.3 | $ | 13.6 | 7.3 | |||||||
Nine Months Ended | Nine Months Ended | ||||||||||||
September 30, 2017 | September 30, 2016 | ||||||||||||
Amount | % | Amount | % | ||||||||||
Net sales | $ | 528.9 | 100.0 | $ | 557.5 | 100.0 | |||||||
Cost of goods sold | 412.3 | 78.0 | 440.1 | 78.9 | |||||||||
Gross profit | 116.6 | 22.0 | 117.4 | 21.1 | |||||||||
Operating expenses: | |||||||||||||
Selling, general and administrative | 60.1 | 11.4 | 51.7 | 9.3 | |||||||||
Research & development | 2.7 | 0.5 | 2.9 | 0.5 | |||||||||
Income from operations | 53.8 | 10.2 | 62.8 | 11.3 | |||||||||
Interest expense, net | 4.4 | 0.8 | 5.6 | 1.0 | |||||||||
Foreign exchange loss, net | — | — | 0.5 | 0.1 | |||||||||
Provision for income taxes | 15.7 | 3.0 | 18.1 | 3.3 | |||||||||
Net income | 33.7 | 6.4 | 38.6 | 6.9 | |||||||||
Three months ended September 30, 2017 compared to the three months ended September 30, 2016
Net Sales
Net sales represent the selling price of the products, net of any customer-related rebates, plus freight and any other items invoiced to customers. Net sales for the three months ended September 30, 2017 were $183.8 million, a decrease of $2.2 million, or 1.2%, as compared to $186.0 million for the same period in 2016, with prices down 4.5%, partially offset by higher volumes of 3.3%. Food, Health and Nutrition sales were up 5.0%, or $4.7 million, with selling prices lower by 3.4%, or $3.2 million principally in the Food business which was driven by unfavorable market conditions, and the overall Food, Health and Nutrition segment was adversely affected by customer mix. The Food, Health and Nutrition segment had positive volume results in the current quarter with 5 weeks of sales totaling $10.2 million from the newly acquired Novel Ingredients business. Industrial Specialties sales were down 3.5%, or $2.4 million, with selling prices lower by 4.8%, or $3.4 million, due to price competition in technical-grade phosphates, partially offset by higher volumes of 1.3%, or $1.0 million. Other sales were lower by 19.9%, or $4.5 million, with volume lower by 12.0%, or $2.7 million due to strong commodity fertilizer sales in the prior year period, and prices lower by 7.9%, or $1.8 million.
The Company calculates pure selling price dollar variances as the selling price for the current year to date period minus the selling price for the prior year to date period, and then multiplies the resulting selling price difference by the prior year to date period volume. Volume variance is calculated as the total sales variance minus the selling price variance and refers to the revenue effect of changes in tons sold at the relative prices applicable to the variation in tons, otherwise known as volume/mix.
Page 27 of 40
The following table illustrates for the three months ended September 30, 2017 the percentage changes in net sales by reportable segment compared with the same period of the prior year, including the effect of price and volume/mix changes upon revenue:
Price | Volume/Mix | Total | ||||||
Food, Health and Nutrition | (3.4 | )% | 8.4 | % | 5.0 | % | ||
Industrial Specialties | (4.8 | )% | 1.3 | % | (3.5 | )% | ||
Other | (7.9 | )% | (12.0 | )% | (19.9 | )% | ||
Total | (4.5 | )% | 3.3 | % | (1.2 | )% | ||
Gross Profit
Gross profit represents net sales less cost of goods sold. Gross profit for the three months ended September 30, 2017 was $41.0 million, an increase of $0.5 million, or 1.2%, as compared to $40.5 million for the same period in 2016. Gross profit percentage of net sales increased to 22.3% for the three months ended September 30, 2017 versus 21.8% for the same period in 2016 due to improving mix into higher value products. Gross profit in 2017 was favorably affected by $7.7 million lower raw material costs, mainly phosphate rock and MGA, $0.6 million lower depreciation, and $0.3 million lower manufacturing costs. These favorable effects were partially offset by $8.4 million lower selling prices, $0.4 million unfavorable exchange rates from our Mexican peso and Canadian dollar based costs, and $0.1 million lower sales volumes. Results from the newly acquired Novel Ingredients business favorably affected gross profit by $0.8 million, which includes a $1.4 million charge for fair value inventory purchase accounting.
Operating Expenses and Research and Development
Operating expenses consist primarily of selling, general and administrative and research and development expenses. Operating expenses for the three months ended September 30, 2017 were $22.0 million, an increase of $3.4 million, or 18.3%, as compared to $18.6 million for the same period in 2016. The increase was mainly due to $3.0 million of transaction and integration costs related to the Novel Ingredients acquisition and $1.7 million of Novel Ingredients operating expenses for the period, partially offset by $1.3 million lower employee related costs.
Operating Income
Operating income for the three months ended September 30, 2017 was $19.0 million, a decrease of $2.9 million, or 13.2%, as compared to $21.9 million for the same period in 2016. Operating income as a percentage of net sales decreased to 10.3% versus 11.8% for the same period in 2016, for the reasons noted above.
Interest Expense, net
Net interest expense, including deferred financing amortization expense, for the three months ended September 30, 2017 was $1.6 million, a decrease of $0.3 million, or 15.8%, as compared to $1.9 million for the same period in 2016. The decrease was primarily due to lower interest rates under our December 2016 renewed credit facility.
Foreign Exchange
Foreign exchange for the three months ended September 30, 2017 was a gain of $0.1 million as compared to a gain of $0.1 million for the same period in 2016. The US Dollar is the functional currency of our Mexican and Canadian operations. The Company has greater foreign denominated asset balances (largely Mexican Peso and Canadian Dollar), such as VAT receivables and prepaid income taxes in foreign jurisdictions, than offsetting foreign denominated liability balances. Foreign exchange gain or loss is recorded on remeasurement of non-US Dollar denominated monetary assets and liabilities. Such gains and losses fluctuate from period to period as the foreign currencies strengthen or weaken against the US Dollar and the amount of non-US Dollar denominated assets and liabilities increases or decreases.
Provision for Income Taxes
The effective income tax rate was 33% for the three months ended September 30, 2017 compared to 31% for the same period in 2016. The variances in the effective tax rate are primarily due to prior year tax return true-ups which increased the effective tax rate by 3% as compared to the same period last year, partially offset by increased income in lower tax rate jurisdictions which decreased the effective tax rate by 1% in the current quarter.
Page 28 of 40
Net Income
Net income for the three months ended September 30, 2017 was $11.6 million, a decrease of $2.0 million, as compared to $13.6 million for the same period in 2016, due to the factors described above.
Nine months ended September 30, 2017 compared to the nine months ended September 30, 2016
Net Sales
Net sales represent the selling price of the products, net of any customer-related rebates, plus freight and any other items invoiced to customers. Net sales for the nine months ended September 30, 2017 were $528.9 million, a decrease of $28.6 million, or 5.1%, as compared to $557.5 million for the same period in 2016, with prices down 5.0% and volumes down 0.1%. Food, Health and Nutrition sales were down 1.8%, or $5.1 million, with selling prices lower by 3.6%, or $10.4 million, principally driven by unfavorable market conditions and customer mix. The Food, Health and Nutrition volume results were higher by 1.8%, or $5.3 million, largely driven by $10.2 million from the results of the newly acquired Novel Ingredients business. Industrial Specialties sales were down 8.3%, or $17.9 million, with selling prices lower by 6.1%, or $13.3 million, due to price competition in technical-grade phosphates, and volumes lower by 2.2%, or $4.6 million. Other sales were lower by 10.4%, or $5.6 million, with prices lower by 7.3%, or $3.9 million, and volumes lower by 3.1%, or $1.7 million.
The Company calculates pure selling price dollar variances as the selling price for the current year to date period minus the selling price for the prior year to date period, and then multiplies the resulting selling price difference by the prior year to date period volume. Volume variance is calculated as the total sales variance minus the selling price variance and refers to the revenue effect of changes in tons sold at the relative prices applicable to the variation in tons, otherwise known as volume/mix.
The following table illustrates for the nine months ended September 30, 2017 the percentage changes in net sales by reportable segment compared with the same period of the prior year, including the effect of price and volume/mix changes upon revenue:
Price | Volume/Mix | Total | ||||||
Food, Health and Nutrition | (3.6 | )% | 1.8 | % | (1.8 | )% | ||
Industrial Specialties | (6.1 | )% | (2.2 | )% | (8.3 | )% | ||
Other | (7.3 | )% | (3.1 | )% | (10.4 | )% | ||
Total | (5.0 | )% | (0.1 | )% | (5.1 | )% | ||
Gross Profit
Gross profit represents net sales less cost of goods sold. Gross profit for the nine months ended September 30, 2017 was $116.6 million, a decrease of $0.8 million, or 0.7%, as compared to $117.4 million for the same period in 2016. Gross profit percentage of net sales increased to 22.0% for the nine months ended September 30, 2017 versus 21.1% for the same period in 2016 due to improving mix into higher value products. Gross profit in 2017 was favorably affected by $28.7 million lower raw material costs, mainly phosphate rock and MGA, and $2.6 million lower manufacturing costs. These favorable effects were partially offset by $27.6 million lower selling prices, $5.4 million lower sales volumes, and $3.2 million expenses for the implementation of Phase 2 Operational Excellence initiatives. Results from the newly acquired Novel Ingredients business favorably affected gross profit by $0.8 million, which includes a charge of $1.4 million for fair value inventory purchase accounting. Included in 2016 gross profit was $2.4 million planned maintenance outage expense at our Coatzacoalcos, Mexico manufacturing facility and a $0.9 million charge for a GTSP lower of cost or market reserve.
Operating Expenses and Research and Development
Operating expenses consist primarily of selling, general and administrative expenses and research and development expenses. Operating expenses for the nine months ended September 30, 2017 were $62.8 million, an increase of $8.2 million, or 15.0%, as compared to $54.6 million for the same period in 2016. The increase was due to $3.3 million for strategic initiatives, $3.0 million of transaction and integration costs related to the Novel Ingredients acquisition, $1.7 million of Novel Ingredients operating expenses for the current period, $1.1 million higher severance costs, partially offset by $0.9 million lower employee related expenses.
Operating Income
Operating income for the nine months ended September 30, 2017 was $53.8 million, a decrease of $9.0 million, or 14.3%, as compared to $62.8 million for the same period in 2016. Operating income as a percentage of net sales decreased to 10.2% versus 11.3% for the same period in 2016 for the reasons noted above.
Page 29 of 40
Interest Expense, net
Net interest expense, including deferred financing amortization expense, for the nine months ended September 30, 2017 was $4.4 million, a decrease of $1.2 million, or 21.4%, as compared to $5.6 million for the same period in 2016. The decrease was primarily due to lower average loan balances and interest rates, lower leverage ratios and lower applicable margins under our December 2016 renewed credit facility.
Foreign Exchange
Foreign exchange for the nine months ended September 30, 2017 was zero compared to a gain of $0.5 million for the same period in 2016. The US Dollar is the functional currency of our Mexican and Canadian operations. The Company has greater foreign denominated asset balances (largely Mexican Peso and Canadian Dollar), such as VAT receivables and prepaid income taxes in foreign jurisdictions, than offsetting foreign denominated liability balances. Foreign exchange gain or loss is recorded on remeasurement of non-US Dollar denominated monetary assets and liabilities. Such gains and losses fluctuate from period to period as the foreign currencies strengthen or weaken against the US Dollar and the amount of non-US Dollar denominated assets and liabilities increases or decreases.
Provision for Income Taxes
The effective income tax rate was 32% for the nine months ended September 30, 2017 compared to 32% for the same period in 2016. The change in the components of the effective tax rate are primarily due to the adoption of ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, changing the accounting for tax benefits from stock option exercises and vesting of restricted stock and performance awards, which decreased the effective tax rate by 2%, a permanent adjustment attributable to an inventory obsolescence reserve in Mexico in the prior year, which decreased the effective tax rate by 1% as compared to last year and prior year tax return true-ups which increased the effective tax rate by 3% as compared to last year.
Net Income
Net income for the nine months ended September 30, 2017 was $33.7 million, a decrease of $4.9 million, as compared to $38.6 million for the same period in 2016, due to the factors described above.
Page 30 of 40
Segment Reporting
The Company's chief executive officer is the chief operating decision maker and, as of the first quarter of 2017, has determined to assess the Company's performance and allocate the appropriate resources based on the following operating segments: (1) Food, Health and Nutrition, (2) Industrial Specialties and (3) Other. The new reporting segments accurately reflect the underlying business dynamics and align with the strategic direction of the Company. The primary performance indicators for the chief operating decision maker are sales and EBITDA. The following table sets forth the results of these indicators by segment for the three and nine months ended September 30, 2017 and 2016:
Three Months Ended | ||||||||||
September 30, 2017 | September 30, 2016 | Net Sales % Change | ||||||||
Segment Net Sales | ||||||||||
Food, Health and Nutrition | $ | 98,276 | $ | 93,586 | 5.0 | % | ||||
Industrial Specialties | 67,682 | 70,124 | (3.5 | )% | ||||||
Other | 17,881 | 22,327 | (19.9 | )% | ||||||
Total | $ | 183,839 | $ | 186,037 | (1.2 | )% | ||||
Segment EBITDA | ||||||||||
Food, Health and Nutrition | $ | 16,442 | $ | 19,649 | ||||||
Industrial Specialties | 13,491 | 10,237 | ||||||||
Other | (1,145 | ) | 1,942 | |||||||
Total | $ | 28,788 | $ | 31,828 | ||||||
Segment EBITDA % of net sales | ||||||||||
Food, Health and Nutrition | 16.7 | % | 21.0 | % | ||||||
Industrial Specialties | 19.9 | % | 14.6 | % | ||||||
Other | (6.4 | )% | 8.7 | % | ||||||
Total | 15.7 | % | 17.1 | % | ||||||
Depreciation and amortization expense | ||||||||||
Food, Health and Nutrition | $ | 5,664 | $ | 5,802 | ||||||
Industrial Specialties | 3,488 | 2,957 | ||||||||
Other | 726 | 1,284 | ||||||||
Total | $ | 9,878 | $ | 10,043 | ||||||
Page 31 of 40
Nine Months Ended | ||||||||||
September 30, 2017 | September 30, 2016 | Net Sales % Change | ||||||||
Segment Net Sales | ||||||||||
Food, Health and Nutrition | $ | 281,558 | $ | 286,660 | (1.8 | )% | ||||
Industrial Specialties | 198,721 | 216,591 | (8.3 | )% | ||||||
Other | 48,644 | 54,304 | (10.4 | )% | ||||||
Total | $ | 528,923 | $ | 557,555 | (5.1 | )% | ||||
Segment EBITDA | ||||||||||
Food, Health and Nutrition | $ | 49,098 | $ | 59,326 | ||||||
Industrial Specialties | 31,666 | 29,934 | ||||||||
Other | 2,086 | 1,698 | ||||||||
Total | $ | 82,850 | $ | 90,958 | ||||||
Segment EBITDA % of net sales | ||||||||||
Food, Health and Nutrition | 17.4 | % | 20.7 | % | ||||||
Industrial Specialties | 15.9 | % | 13.8 | % | ||||||
Other | 4.3 | % | 3.1 | % | ||||||
Total | 15.7 | % | 16.3 | % | ||||||
Depreciation and amortization expense | ||||||||||
Food, Health and Nutrition | $ | 16,884 | $ | 15,845 | ||||||
Industrial Specialties | 10,346 | 9,554 | ||||||||
Other | 1,779 | 3,208 | ||||||||
Total | $ | 29,009 | $ | 28,607 | ||||||
Page 32 of 40
A reconciliation of net income to EBITDA follows:
Three months ended | ||||||||
September 30, 2017 | September 30, 2016 | |||||||
Net income | $ | 11,582 | $ | 13,643 | ||||
Provision for income taxes | 5,698 | 6,227 | ||||||
Interest expense, net | 1,630 | 1,915 | ||||||
Depreciation and amortization | 9,878 | 10,043 | ||||||
EBITDA | $ | 28,788 | $ | 31,828 | ||||
Nine months ended | ||||||||
September 30, 2017 | September 30, 2016 | |||||||
Net income | $ | 33,728 | $ | 38,589 | ||||
Provision for income taxes | 15,678 | 18,135 | ||||||
Interest expense, net | 4,435 | 5,627 | ||||||
Depreciation and amortization | 29,009 | 28,607 | ||||||
EBITDA | $ | 82,850 | $ | 90,958 | ||||
Three months ended September 30, 2017 compared to the three months ended September 30, 2016
Segment Net Sales:
Food, Health and Nutrition net sales increased 5.0% for the three months ended September 30, 2017 compared with the same period in 2016. Volumes increased 8.4%, partially offset by an average selling price decrease of 3.4%. The Food, Health and Nutrition net sales were favorably affected 11.0% by the inclusion of the results of the newly acquired Novel Ingredients business. Lower selling prices were primarily due to unfavorable market/customer mix.
Industrial Specialties net sales decreased 3.5% for the three months ended September 30, 2017 compared with the same period in 2016. Average selling prices decreased 4.8%, primarily due to strong competition in technical grade products, partially offset by increased volumes of 1.3%.
Other net sales decreased 19.9% for the three months ended September 30, 2017 compared with the same period in 2016. Volumes decreased 12.0%, mostly due to strong commodity fertilizer sales in the prior year period, and average selling prices decreased 7.9%.
Segment EBITDA Percentage of Net Sales:
The 430 basis point decrease in Food, Health and Nutrition EBITDA margins for the three months ended September 30, 2017 compared with the same period in 2016 is due to lower average selling prices which decreased margins by 280 basis points, lower sales volume/mix which decreased margins by 180 basis points, the inclusion of the newly acquired Novel Ingredients business which decreased margins by 240 basis points, primarily due to a fair value inventory adjustment which decreased margins by 150 basis points, and other higher costs which decreased margins by 70 basis points. This decrease was partially offset by lower manufacturing costs which increased margins by 220 basis points and decreased raw material costs, mainly phosphate rock and MGA, which increased margins by 120 basis points.
The 530 basis point increase in Industrial Specialties EBITDA margins for the three months ended September 30, 2017 compared with the same period in 2016 is due to lower raw material costs, mainly phosphate rock and MGA, which increased margins by 470 basis points, higher sales volume/mix which increased margins by 310 basis points, and lower manufacturing and operating costs which increased margins by 280 basis points. This increase was partially offset by lower average selling prices which decreased margins by 440 basis points, and other higher costs which decreased margins by 90 basis points.
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The 1,510 basis point decrease in Other EBITDA margins for the three months ended September 30, 2017 compared with the same period in 2016 is due to higher manufacturing and operating costs which decreased margins 1,570 basis points, higher strategic project expenses which decreased margins by 1,340 basis points, and lower selling prices which decreased margins 800 basis points. This decrease was partially offset by lower raw material costs which increased margins by 1,480 basis points and higher sales volume/mix which increased margins by 720 basis points.
Nine months ended September 30, 2017 compared to the nine months ended September 30, 2016
Segment Net Sales:
Food, Health and Nutrition net sales decreased 1.8% for the nine months ended September 30, 2017 compared with the same period in 2016. Average selling prices decreased by 3.6%, primarily due to unfavorable market/customer mix, which was partially offset by increased volumes of 1.8%. The Food, Health and Nutrition net sales were favorably affected 3.6% from the results of the newly acquired Novel Ingredients business.
Industrial Specialties net sales decreased 8.3% for the nine months ended September 30, 2017 compared with the same period in 2016. Average selling prices decreased 6.1%, due to competitive pressures on technical grade products, and volumes decreased 2.2%, primarily due to the year-over-year effect from pruning of lower margin, less differentiated applications.
Other net sales decreased 10.4% for the nine months ended September 30, 2017 compared with the same period in 2016. Average selling prices decreased 7.3%, due to lower commodity market prices, and volumes decreased 3.1%.
Segment EBITDA Percentage of Net Sales:
The 330 basis point decrease in Food, Health and Nutrition EBITDA margins for the nine months ended September 30, 2017 compared with the same period in 2016 is due to lower average selling prices which decreased margins by 300 basis points, higher strategic project expenses which decreased margins by 130 basis points, lower sales volume/mix which decreased margins by 130 basis points and the inclusion of the newly acquired Novel Ingredients business which decreased margins by 80 basis points, primarily due to a fair value inventory adjustment which decreased margins by 50 basis points. This decrease was partially offset by decreased raw material costs, mainly phosphate rock and MGA, which increased margins by 220 basis points and lower manufacturing and operating costs which increased margins by 70 basis points. Included in 2016 was turnaround costs which increased margins by 20 basis points in 2017.
The 210 basis point increase in Industrial Specialties EBITDA margins for the nine months ended September 30, 2017 compared with the same period in 2016 is due to lower raw material costs, mainly phosphate rock and MGA, which increased margins by 550 basis points, lower manufacturing and operating cost which increased margins by 200 basis points, and higher sales volume/mix which increased margins by 130 basis points. This increase was partially offset by lower average selling prices which decreased margins by 560 basis points, higher strategic project expenses which decreased margins by 130 basis points, and increased severance cost which decreased margins by 30 basis points. Included in 2016 was turnaround costs which increased margins by 50 basis points in 2017.
The 120 basis point increase in Other EBITDA margins for the nine months ended September 30, 2017 compared with the same period in 2016 is due to lower raw material costs which increased margins by 1,860 basis points, higher sales volume/mix which increased margins by 170 basis points, and favorable translation effects which increased margins by 40 basis points. This increase was partially offset by higher manufacturing and operating costs which decreased margins by 890 basis points, lower selling prices which decreased margins by 770 basis points, and higher strategic project expenses which decreased margins by 570 basis points. Included in 2016 was a $0.9 million charge for a GTSP lower of cost or market reserve which increased margins by 170 basis points in 2017, and turnaround costs which increased margins by 110 basis points in 2017.
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Liquidity and Capital Resources
Cash Flow Summary
The following table sets forth a summary of the Company’s cash flows for the periods indicated.
(Dollars in millions) | Six months ended | ||||||
September 30, 2017 | September 30, 2016 | ||||||
Operating Activities | $ | 46.7 | $ | 81.8 | |||
Investing Activities | (148.6 | ) | (25.7 | ) | |||
Financing Activities | 81.2 | (41.6 | ) | ||||
Effect of foreign exchange rate changes | — | 0.3 | |||||
Nine months ended September 30, 2017 compared to nine months ended September 30, 2016
Net cash from operating activities was $46.7 million for the nine months ended September 30, 2017 as compared to $81.8 million for 2016, a decrease of $35.1 million. The decrease in operating activities cash resulted from unfavorable changes of $32.3 million in working capital and $4.9 million in net income, as described above, partially offset by favorable changes of $1.7 million in other long term assets and liabilities and $0.4 million non-cash adjustments to income.
The change in working capital is derived from it being a use of cash of $15.9 million in 2017 compared to a source of $16.4 million in 2016, a decrease in cash of $32.3 million. The change in working capital was due to unfavorable changes in inventory of $30.2 million, driven by adjusting inventory levels in the prior year, accounts receivable of $12.9 million due to the effects of extended payment terms, other current assets of $2.0 million, primarily due to timing of vendor prepayments and accounts payable of $5.0 million. Accounts receivable has increased as a percent of quarterly sales compared to the last four quarters' average due to pressures on customer payment terms. These unfavorable effects were partially offset by a favorable change in other current liabilities of $17.8 million, largely due to U.S. income tax payments in the prior year.
Net cash used for investing activities was $148.6 million for the nine months ended September 30, 2017, compared to $25.7 million for 2016, an increase in spending of $122.9 million. The change was due to the acquisition of Novel Ingredients for $125.0 million, partially offset by $1.0 million cash received from the sale of an administrative building and a $1.1 million decrease in capital spending.
Approximately 60% of the 2017 capital spending was for strategic growth initiatives and the remaining 40% was for plant maintenance projects. Approximately half of the strategic growth investments were focused on the deep well injection system project at our Geismar, LA facility which accounts for approximately 30% of the Company's total capital expenditures. The Company expects to come in favorable to budget and spend $15 million total on the project, of which $2.0 million occurred in 2016 and $7.7 million occurred in the first three quarters of 2017, with the majority of the remaining $5.3 million of projected spending to occur in the fourth quarter 2017.
Net cash from financing activities for the nine months ended September 30, 2017 was $81.2 million, compared to a use of $41.6 million in 2016, an increase in cash of $122.7 million. This increase in cash was largely due to $125.0 million increased loan borrowings for the Novel Ingredients acquisition.
Innophos may from time to time seek to acquire or otherwise retire outstanding debt through privately negotiated transactions, exchanges or otherwise. Debt repurchases or exchanges, if any, will depend on prevailing market conditions, Company liquidity requirements, restrictive financial covenants and other factors applicable at the time. The amounts involved may be material.
During the nine months ended September 30, 2017, the Company spent $3.9 million related to restructuring activities initiated during the third quarter of 2015, and anticipates spending $2.2 million within the next twelve months.
On September 30, 2017, the Company had cash and cash equivalents outside the United States of $25.3 million, or 77% of the Company's balance. The foreign cash amounts are not restricted by law to be used in other countries. Our current operating plan does not include any other repatriation of any additional cash and cash equivalents held outside the United States to fund the United States operations. However, in the event we do repatriate cash and cash equivalents held outside of the United States, we may be required to accrue and pay United States taxes to repatriate these funds.
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The Company’s available financial resources allow for the continuation of dividend payments, pursuit of acquisition
projects and further geographic expansion initiatives. We further believe that on hand cash combined with cash generated from
operations, including our Mexican operations, and availability under our revolving line of credit in our credit agreement, will be sufficient to meet our obligations such as debt service, tax payments, capital expenditures and working capital requirements for at least the next twelve months. We expect to fund all these obligations through our existing cash, our future operating cash flows and our existing revolving line of credit. However, future operating performance for the Company is subject to prevailing
economic and competitive conditions and various other factors that are uncertain. If the cash flows and other capital resources
available to the Company, such as its revolving loan facility, are insufficient to fund our debt and other liquidity needs, the
Company may have to take alternative actions that differ from current operating plans.
Critical Accounting Estimates and Policies
There have been no material changes from the critical accounting estimates previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to certain market risks as part of our ongoing business operations. Primary exposures include changes in interest rates, as borrowings under our credit agreement will bear interest at floating rates based on LIBOR plus an applicable borrowing margin. We manage our interest rate risk by balancing the amount of fixed-rate and floating-rate debt to the extent practicable consistent with our credit status. For fixed-rate debt, interest rate changes do not affect earnings or cash flows. Conversely, for floating-rate debt, interest rate changes generally affect our earnings and cash flows, assuming other factors are held constant.
At September 30, 2017, we had a $450.0 million revolving credit facility, of which $295.0 million of variable-rate debt was outstanding, which approximates fair value (determined using level 2 inputs within the fair value hierarchy). Total remaining availability was $153.9 million, taking into account $1.1 million in face amount of letters of credit issued under the sub-facility. In December 2012, Innophos entered into an interest rate swap, swapping the LIBOR exposure on $100.0 million of floating rate debt, which is currently outstanding under our current credit agreement, with a fixed rate of 0.9475% plus the applicable margin on the debt expiring in December 2017. This interest rate swap has been designated as a cash flow hedge with the changes in value recorded through other comprehensive income. The fair value of this interest rate swap of approximately $0.1 million (determined using level 2 inputs within the fair value hierarchy) is recorded in other long-term liabilities as of September 30, 2017.
Changes in economic conditions could result in higher interest rates, thereby increasing our interest expense on our revolving line of credit. Changes in economic conditions may also result in lower operating income, reducing our funds available for capital investment, operations or other purposes. In addition, a substantial portion of our operating cash flow and available borrowing capacity on our credit facility has been used to repurchase shares, pay dividends, fund capital expenditures, fund working capital needs and service debt, which may affect our ability to make future acquisitions. We have and may continue from time to time used interest rate protection agreements to minimize our exposure to interest rate fluctuation. Regardless of hedges, we may experience economic loss and a negative impact on earnings or net assets as a result of interest rate fluctuations. Based on $195.0 million outstanding borrowings as floating rate debt (amount not covered by the swap), an immediate increase of one percentage point would cause an increase to interest expense of approximately $2.0 million per year.
We do not currently, but may from time to time, hedge our currency rate and energy risks.
We believe that our concentration of credit risk related to trade accounts receivable is limited since these receivables are spread among a number of customers and are geographically dispersed. No customer accounted for more than 10% of our sales in the last 3 years.
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Foreign Currency Exchange Rates
The US Dollar is the functional currency of the Canadian and Mexican operations. Accordingly, these operations’ monetary assets and liabilities are remeasured at current exchange rates, non-monetary assets and liabilities are remeasured at historical exchange rates, and revenue and expenses are remeasured at average exchange rates and at historical exchange rates for the related revenue and expenses of non-monetary assets and liabilities. All transaction gains and losses are included in net income.
Our principal source of exchange rate exposure in our foreign operations consists of expenses, such as labor expenses, which are denominated in the foreign currency of the country in which we operate. A decline in the value of the US Dollar relative to the local currency would generally cause our operational expenses (particularly labor costs) to increase (conversely, a decline in the value of the foreign currency relative to the US Dollar would cause these expenses to decrease). We believe that normal exchange rate fluctuations consistent with recent historical trends would have a modest impact on our expenses, and would not materially affect our financial condition or results of operations. Nearly all of our sales are denominated in US Dollars and our exchange rate exposure in terms of sales revenues is minimal. However, the strength or weakness of the USD versus other currencies can affect our competitiveness in the US and export markets.
Inflation and changing prices
Our costs and expenses will be subject to inflation and price fluctuations. Significant price fluctuations in raw materials, freight and energy costs, if not compensated for by cost savings from production efficiencies or price increases passed on to customers, could have a material effect on our financial condition and results of operations.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as “structured finance or special purpose entities”, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
ITEM 4. | CONTROLS AND PROCEDURES |
Disclosure Control and Procedures
The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) that are designed to provide reasonable assurance that information required to be reported in the Company's consolidated financial statements and filings is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission, or SEC, and that such information is accumulated and communicated to the Company's management, including its Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives.
As of September 30, 2017, the Company completed an evaluation under the supervision and with the participation of the Company's management, including the Company's Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that the Company's disclosure controls and procedures are effective at the reasonable assurance level.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during or with respect to the third quarter of 2017 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. The Company acquired Novel Ingredients on August 25, 2017 and is in the process of evaluating and integrating this company into the Company’s existing internal control over financial reporting. The Management’s Report on Internal Control Over Financial Reporting to be included in the Annual Report on Form 10-K for the year ending December 31, 2017 will exclude Novel Ingredients, and we will disclose any material changes in our internal controls over financial reporting with respect to Novel Ingredients in the Annual Report on Form 10-K for the year ending December 31, 2018.
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PART II - OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
Note 14 of Notes to Consolidated Condensed Financial Statements in “Part I, Item 1. Financial Statements" contained in this Quarterly Report on Form 10-Q is incorporated herein by reference.
ITEM 1A. | RISK FACTORS |
There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
The Company did not have any share repurchases on the open market during the third quarter of 2017. From time to time, the Company reacquires shares from employees in connection with the vesting, exercise and forfeiture of awards under its equity compensation plans. No such re-aquisitions took place in the third quarter of 2017.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
ITEM 4. | MINE SAFETY DISCLOSURES |
None.
ITEM 5. | OTHER INFORMATION |
None.
ITEM 6. | EXHIBITS |
a) Exhibits. The following exhibits are filed or furnished as part of this report:
Exhibit No. | Description | |
Certification of Principal Executive Officer dated October 31, 2017 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
Certification of Principal Financial Officer dated October 31, 2017 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
Certification of Principal Executive Officer dated October 31, 2017 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
Certification of Principal Financial Officer dated October 31, 2017 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
* | Not to be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that section, nor deemed to be incorporated by reference into any filing under that Act or the Securities Act of 1933. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
INNOPHOS HOLDINGS, INC. | |
/s/ Kim Ann Mink | |
By: | Kim Ann Mink |
Its: | Chief Executive Officer, President and Director |
(Principal Executive Officer) | |
Dated: | October 31, 2017 |
INNOPHOS HOLDINGS, INC. | |
/s/ Han Kieftenbeld | |
By: | Han Kieftenbeld |
Its: | Senior Vice President and Chief Financial Officer |
(Principal Financial Officer) | |
Dated: | October 31, 2017 |
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EXHIBIT INDEX
Exhibit No. | Description | |
31.1 | Certification of Principal Executive Officer dated October 31, 2017 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of Principal Financial Officer dated October 31, 2017 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1* | Certification of Principal Executive Officer dated October 31, 2017 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2* | Certification of Principal Financial Officer dated October 31, 2017 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
* | Not to be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that section, nor deemed to be incorporated by reference into any filing under that Act or the Securities Act of 1933. |
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